INSIGHT: Proposed new PDH units may lead to resurgence for US PP

12 March 2013 17:03  [Source: ICIS news]

By Michelle Klump

HOUSTON (ICIS)--In these times of wild propylene volatility, when prices are just as apt to swing up by 15 cents/lb ($331/tonne, €255/tonne) one month as they are to swing back down by 20 cents/lb the next, it is hard to imagine a future golden age for any of its derivatives -- especially polypropylene (PP).

Yet, with recent announcements of at least seven planned propane dehyrodgenation (PDH) units to be built in the next three to five years, many market participants are banking on more pricing stability leading to resurgence in demand for the commodity.

It can't come too soon for many buyers. Since December 2012, US PP prices have followed feedstock propylene prices up by 31%, and in March, they are poised to begin to slide down.

"Customers are constantly getting whipsawed," said one PP distributor about current market dynamics. "They know that within 10 minutes of getting all filled up with high-priced resins, prices are going to go careening back down on them ... it's no way to run a business."

Several years of this type of volatility has had a negative impact on market growth.

In 2012, Phillips Sumika shuttered its 365,000 tonne/year PP plant in Pasadena, Texas because of tough market conditions. At the time, market participants speculated that other closures or consolidations might be on the horizon, though that has so far not proven to be the case.

For full year 2012, the US PP market saw sales growth of less than 1%, according to data from the American Chemistry Council (ACC). While domestic sales improved by slightly more than 1%, the overall figure was brought down by an 11% drop in export sales. For the year, exports accounted for less than 5% of sales, according to the ACC.

Low demand growth is expected to continue for at least the next few years, until the PDH units are up and running and propylene becomes more available, sources said.

Stewart Hardy, the global manager for petrochemical market dynamics for Nexant Chemsystems, has said the propylene production from planned PDH plants will cover all of the propylene lost as a result of a shift by US steam crackers to lighter feedstocks, in addition to providing for some growth.

The seven new projects announced by five different producers could potentially bring at least 4m tonnes/year of fresh capacity to the market.

There are some naysayers who doubt that all of the announced PDH units will be built. For instance, LyondellBasell CEO Jim Gallogly has said he is sceptical about a lasting US propane advantage because of the possibility of propane exports out of the US.

But for the most part, market participants and industry watchers see potential good times ahead for the industry, with the first benefit being less volatility for the PP market.

A more stable source of propylene tied to natural gas will lead to less reliance on the refining sector, which will, in turn, lead to fewer price swings during refinery turnaround season.

"Anything that can reduce the volatility of polypropylene, or ultimately help with propylene prices is a good thing, because PP has been on a rollercoaster ride for a good part of the last couple of years," said Phillip Karig, managing director of Mathelin Bay Associates, a US and European plastics industry consultant.

It has been the volatility, more than higher resin prices, which has slowed demand in the PP market and caused many processors to switch, where possible, to polyethylene, or, where not possible, to importing finished goods from Asia.

"The volatility is very hard to live with if you are making items for a big box retailer," Karig said. "You can't say, 'You know that microwavable tray I sold to you for 20 cents last month, well I'm now going to sell it to you for 30 cents.' It is just not going to work."

Once the volatility becomes less of a factor, there may be room again for additional growth in the PP market, sources said.

"There will be buyers who switch back," Karig said. "If you remove the volatility, you remove some of the risk. When the risk goes down, the consumption is going to go up incrementally."

So far, there haven't been any significant announcements about new PP capacity planned for the US. However, with US production rates running typically in the low 80% of capacity range, market participants say there is plenty of room for existing plants to increase production rates to absorb some of the extra propylene that will be produced.

And as with planned expansions in the US ethylene and polyethylene markets, much of any additional capacity created will be targeted at the export market.

"When propylene prices are too high, we export less PP, so a lot of additional propylene from PDH plants probably means that price is going to come down, which means it will make sense for the US to be able to export more," said Dan Lippe, president of Petral Consulting Company.   

With global PP demand growth estimated at 5% per year, and US PP demand growth significantly lower than that, it makes sense for US producers to eventually target global buyers.

However, while it will lead to more stable demand, Lippe cautioned that increased exports won't necessarily mean significant profits for PP producers.

"The people who build the PDH plants, they will make money. How they sell their propylene is another question, but my view is they will turn it into PP, because it is easier to ship," he said.

"I'm not saying there is going to be a golden age for PP. I don't think there is."

($1 = €0.77)

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By: Michelle Klump
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